Summer 2012

The listing below illustrates the range of topics addressed in the new working papers and publications posted since the last Research Update.

PURC Celebrates Its 40th Year

PURC commemorates its 40th anniversary this year. Since its founding in 1972, PURC has grown from a small group hosting one meeting each year to an internationally recognized research center offering expanded training and interdisciplinary development programs reaching thousands of professionals in the U.S. and abroad. Learn more about PURC.

Strategic Adaptations: Lessons from U.S. Electricity Industry in the 20th Century

The U.S. approach to electricity policy has been more pragmatic and reactive than strategic. The review of historical changes finds (1) a lack of broad public (and political) consensus regarding the appropriate role of market mechanisms vs. government regulations; (2) policy changes are often responses to events and perceived crises and tend to involve national (and state) legislation; (3) the conflicts and crises arise from a number of sources; and (4) changes appear to be incremental rather than transformational. The article provides an overview of developments in the past half century—placing current debates in a broader context.
Read the paper, "Strategic Adaptations: Lessons from U.S. Electricity Industry in the 20th Century".

Is It Time to Recreate the E-Rate Program?

The U.S. Schools and Libraries program, commonly known as the "E-rate" program, was created by the FCC in 1997, as authorized by the Telecommunications Act of 1996. Since the launch of the program, much has changed in both the access to and use of Internet-based services. Connectivity is now available from more than just wireline telecommunications carriers. Wireless connectivity is vastly more available. High speed connections are available from satellite providers and cable companies. Residential access to broadband services has expanded thereby changing the relationship between schools and residential Internet users, and libraries and both their on-site and off-site patrons. This paper describes how a new E-rate program might be shaped to serve the neediest schools and libraries in the new environment.
Read the paper, "Is It Time to Recreate the E-Rate Program?".

Should Google Be Regulated as a Public Utility?

Some people think so. PURC Director Dr. Mark Jamison addressed this issue at the George Mason University 2nd Annual Conference on Competition, Search, and Social Media. He explained that Google does not fit any of the criteria that would qualify a business as a public utility (such as an electric utility), a common carrier (such as a telecom company), or a possessor of an essential facility.

Google is not a public utility, does not have a public franchise, does not have 100 percent of its market, and does not provide a service that a modern economy cannot do without. The company is not a common carrier because it does not transport information (the underlying telecom companies perform that function) and does not charge exploitive prices. Google does not possess an essential facility, like AT&T did before the 1984 breakup, because Google does not have a monopoly in the relevant retail markets (such as maps, videos, and calendars) and does not refuse rivals access to its search results. Advocates of regulation seem to ignore how regulation would hinder innovation and reduce investment in Internet search.
View "Should Google Be Regulated as a Public Utility?" on YouTube.

The Impact of Wind Generation on the Electricity Spot-Market Price Level and Variance: The Texas Experience

The literature on renewable energy suggests that an increase in intermittent wind generation would reduce the spot electricity market price by displacing high fuel-cost marginal generation. Taking advantage of a large file of Texas-based 15-min data, this paper shows that while rising wind generation does indeed tend to reduce the level of spot prices, it is also likely to enlarge the spot-price variance. The key policy implication is that increasing use of price risk management should accompany expanded deployment of wind generation.
Read the paper, "The Impact of Wind Generation on the Electricity Spot-Market Price Level and Variance: The Texas Experience".

A Meta-Regression Analysis of Benchmarking Studies on Water Utilities Market Structure

This paper updates the literature on international water utility benchmarking studies, focusing on scale and scope economies, and finds several conclusions not previously emphasized. Using meta-regression analysis, the study investigates which variables influence these economies. Results indicate a higher probability of finding diseconomies of scale in large utilities and in countries with higher GDP, while the opposite pattern appears for economies of scope. Furthermore, diseconomies of scale and scope are more likely to be found in publicly owned utilities than when the ownership is mostly private.
Read the paper, "A Meta-Regression Analysis of Benchmarking Studies on Water Utilities Market Structure".

Pricing in Network Industries

The design of pricing policies in network industries is a complex and challenging task, particularly when industry conditions change constantly. This paper reviews pricing policies that are commonly employed in two dynamic network industries—telecommunications and electricity. It analyzes important similarities and differences in pricing policies in these two industries and explores how the policies in both industries have evolved over time in response to changing industry conditions.
Read the paper, "Pricing in Network Industries".

Regulation and Corporate Corruption: New Evidence from the Telecom Sector

Telecommunications is one of the fastest-growing industries in many developing countries, and corporate corruption has become a pervasive and difficult challenge. This paper examines how government regulation affects the form of corruption between business customers and service providers. The study matches the World Bank enterprise-level data on bribes paid to telecom utilities with a unique cross-country telecom regulation dataset. Evidence shows that competition, privatization, regulatory substance, and regulatory governance reduce corruption, among other factors. Overall, regulatory strategies that decrease information asymmetry and increase accountability tend to reduce illegal side-payments for connections.
Read the paper, "Regulation and Corporate Corruption: New Evidence from the Telecom Sector".

Price Cap Regulation: What Have We Learned from 25 Years of Experience in the Telecommunications Industry?

Price cap regulation (PCR) has now been employed in the telecommunications industry for more than a quarter century. This paper reviews the experience with PCR and offers an explanation for its popularity. PCR's design flexibility, its ability to limit undesirable strategic behavior, declining industry costs, and developing competition all enhanced the appeal of PCR. The study also reviews some surprises that have arisen under PCR and discusses the implications of the experience with PCR in the telecommunications industry for regulatory policy in other industries.
Read the paper, "Price Cap Regulation: What Have We Learned from 25 Years of Experience in the Telecommunications Industry?".

An Empirical Analysis of Fixed and Mobile Broadband Diffusion

Broadband communications lie at the heart of the developing information society. Employing a logistic diffusion model, this paper analyzes the factors that influence the diffusion of fixed and mobile broadband. For fixed broadband, it finds that local loop unbundling, income, population density, education, and price are significant factors of fixed broadband diffusion. For mobile broadband, multiple standardization policy and population density are the main factors of the initial diffusion of mobile broadband services. The results of the mobile broadband model also suggest that in many Organization for Economic Co-operation and Development (OECD) countries, mobile broadband service is a complement to fixed broadband service in the initial deployment of broadband.
Read the paper, "An Empirical Analysis of Fixed and Mobile Broadband Diffusion".

PURC Director Dr. Mark Jamison, left, presents the PURC Prize for Best Paper in Regulatory Economics to Cristian Huse of the Stockholm School of Economics.

4th Annual Public Utility Research Center Prize for Best Paper in Regulatory Economics

Sometimes regulations intended to reduce carbon emissions may actually increase emissions if policymakers fail to understand businesses and consumers. That is the conclusion of the paper "Fast and Furious (and Dirty): The Effects of Environmental Policy on the Swedish Car Market," which received the 2012 PURC Prize for Best Paper in Regulatory Economics at the 10th Annual International Industrial Organization Society conference. This paper examined the Swedish Green Car Rebate, which provides financial incentives to customers to buy new green cars, that is, cars that meet new mileage standards or use fuels other than gasoline or diesel. Intended to reduce vehicle carbon emissions and the use of imported oil, the program actually increased both.

Consumers responded to the lower cost of purchasing new vehicles by buying larger ones, which were more affordable by the rebate. Auto manufactures ensured that larger vehicles qualified for the rebates by designing the vehicles to use alternative fuels. However, the alternative fuels were more costly for consumers than gasoline or diesel, so auto manufacturers made the new vehicles as flexible-fuel vehicles. In a sense, customers were able to have their cake and eat it, too, in that they received rebates for buying the larger flexible-fuel vehicles, but continued to use lower-cost, traditional fuels. Emissions levels of regular cars went down, but this downward trend did not appear to be triggered by the introduction of the rebate.

What can policymakers take away from the paper? Whenever policymakers want to change behavior, they should first ask: (1) Is the policy even needed? If the trend is going in the desired direction, maybe a policy change isn't needed. (2) Could the incentive system possibly result in the opposite of what was intended? (3) Is there a more direct way to achieve the objective, for example, subsidizing renewable energy or taxing fossil fuels?

Did You Miss These Recent Studies?

Florida's Storm Hardening Effort: A New Paradigm for State Utility Regulators

This paper describes a multi-year process involving collaboration among electric utilities, the public service commission, and research institutions to improve preparations for future storms using Florida as a case study. The process included planning and decision making about costs and benefits associated with investments in storm hardening with the goal of preserving the reliability of the power system. Although Florida's storm hardening initiative focused on hurricanes, the same process could easily apply to other types of weather events such as ice storms, high winds, and thunderstorms. Moreover, the policy questions raised from the Florida case study would likewise apply to other types of storm hardening investigations.
Read the paper, "Florida's Storm Hardening Effort: A New Paradigm for State Utility Regulators".

The Deployment of Third-Generation Mobile Services: A Multinational Analysis of Contributing Factors

Successful diffusion of 3G mobile is necessary for many advanced mobile applications such as mobile broadband Internet and video. The current deployment of 3G services is significantly more developed in some countries than others. This study examines the factors affecting such differences. It finds that competition in standards, lower levels of 1G and 2G penetration, and higher levels of income contribute to the diffusion of 3G mobile.
Read the paper, "The Deployment of Third-Generation Mobile Services: A Multinational Analysis of Contributing Factors".

Consumer Usage of Broadband Internet Services: An Analysis of the Case of Portugal

Do customers have different preferences for fixed versus mobile broadband? This study analyzes the intensity and patterns of use of fixed and mobile broadband consumers in Portugal. Results indicate that broadband uses are similar across fixed and mobile users, suggesting that the technologies are somewhat substitutable from customers' perspectives and raising the possibility of limited differential effects on innovation and other social goals.
Read the paper, "Consumer Usage of Broadband Internet Services: An Analysis of the Case of Portugal".

Déjà vu or New Horizons?

Utility regulation is undergoing a transition that has only just begun to have its impacts. Interviewing 14 sitting and former state regulators, consumer counsels, and electric utility representatives, authors Dr. Lynne Holt and Mary Galligan gained insights about the effects of federal and state energy mandates for the operations, processes, and priorities of state public utility commissions.

Based on their interviews and research, they discovered the transition in policies has only just begun to have an effect on state commission operations. Yet, these nascent policy changes have also started to impact the discretion exercised by regulators in balancing utility and consumer interests.
Read the paper, "Déjà vu or New Horizons?".